The Geography of Fringe Banking

JANE COVER, CHRIS FOWLER, RACHEL GARSHICK KLEIT, and ANTHONY RUSSO

Abstract: Over the past two decades, the U.S. financial service sector has become increasingly bifurcated into a two-tiered system: the traditional banking system serves primarily middle and upper income individuals, while a less-regulated and more expensive alternative financial sector serves many low- and moderate-income individuals. An estimated 56 million U.S. households now rely on the alternative financial sector – payday lenders, check cashers, pawn brokers, money wiring companies, auto title lenders, and rent-to-own retailers – for basic financial services and transactions. While proponents argue that this service sector fulfills a need in the financial services market, critics allege that these ‘fringe banking services’ charge high fees, create spiraling debt, and contribute nothing toward establishing credit worthiness, all of which impairs the ability of economically vulnerable households to improve their financial fortunes. Moreover, fringe providers are disproportionately present in some minority communities, relative to those that are more predominantly white. This study describes the distribution of fringe banking services across the nation, assessing whether traditional and fringe banks operate in different counties, and whether fringe providers are disproportionately represented in counties with greater racial and ethnic concentration. We find evidence of a greater number of fringe providers in urban and mixed rural counties that have more minorities, net of other factors.

Posted to web September 24, 2009

This is a working draft of the paper.  Please do not cite or quote without authors’ permission.

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